The economic indicators are beginning to head north and that in turn has led to the stability of the Rupee.
Pakistan’s rupee: one to watch](http://thebusinessonline.com/33073/Pakistan_s_rupee_one_to_watch)
**IN ordinary circumstances, investors would be falling over themselves to invest in an economy set to grow by more than 6% a year. But when that economy is Pakistan, which is always over-shadowed by the two nascent economic superpowers to its east, China and India, circumstances are never ordinary.
**Many have missed the recent recovery in the Pakistani rupee, which suffered intense turbulence at the end of last year, culminating in a slump to a low of 61.3650 rupees per dollar on 2 November.
Since then, the rupee has done significantly better, remaining between the 59 and 59.50 level.
In a new report last week, Standard Chartered’s economics and foreign exchange teams argue that while the rupee is still poised to weaken against the greenback over the next 12 months, it will do so by much less than previously believed.
The bank’s new forecasts are that one dollar will be worth 59.35 rupees by the end of this quarter, 59.65 by the end of the second quarter, 59.95 at the end of the third and 60.25 at the end of the fourth.
By the end of this year, the report now believes that the rupee will be worth around 5% more than previously expected. Its slow decline against the greenback can be explained by the fact that consumer price inflation accelerated in January to 8.51% year on year, from 7.37% in December.
Because inflation is higher in Pakistan than it is in the US, the rupee’s external value will tend to decline against the dollar to match its internal loss of value. Higher inflation could also cause capital outflows if the market takes the view that the Pakistani central bank is being insufficiently disciplined.
Even though it continues to underperform its Indian and Chinese neighbours, the Pakistani economy is now growing strongly and benefiting from the macroeconomic stabilisation programme implemented to rescue the country from its 1998-99 economic crisis.
Economic growth accelerated from 5.1% in 2003 to a preliminary estimate of 6.4% in 2004. For 2005, Standard Chartered believes its 6.1% forecast may soon need to be upgraded thanks to a strong cotton crop, better water availability and faster growth in manufacturing output. The Pakistani budget deficit has also improved and is now only 2.4% of GDP - though this figure excludes grants - achieved through a combination of savings on interest payments and extra revenues.
Handouts to state companies have been cut and the
privatisation programme accelerated, with disposals including the Karachi Electric Supply Corporation.
**Other economic positives include a drop in the public debt to GDP ratio to 68% from 100% and the external debt to 37% of GDP from 52%.
Meanwhile, forex reserves now cover 6.2 months of imports of goods and non-factor services.**
According to Standard Chartered, the rupee’s real effective exchange rate, which measures the currency against a weighted basket of its main trading partners, is about 10% undervalued relative to its long-term historical averages.
While the geopolitical situation is far from rosy and inflation remains a problem, the Pakistani rupee is clearly a currency to watch closely.